When you get pre-approved for a mortgage, it is based on a specific recurring payment. The mortgage rate is assumed (as well as other amounts such as taxes and homeowners insurance). Mortgage rate changes affect MA pre-approval amounts because it affects the principal and interest portion of the total payment. It is useful for buyers to understand this since a fluctuation in interest rates can impact home search options.
Mortgage Rate Changes
Mortgage rates may fluctuate on a regular basis. At certain times, they can even change several times on the same day. As a home buyer, you may not know what your specific mortgage rate is until you are under contract to purchase a property, have an estimated closing date, and lock in your mortgage rate. This can create some uncertainty, especially for price sensitive borrowers. It is important to find out what mortgage rate was originally used to calculate the pre-approval and to update the pre-approval. During times when mortgage rates are frequently or dramatically moving, contact your lender before submitting a bid on a home to confirm that you are still qualified to purchase it.
Mortgage Rate Changes Affect MA Pre-approval Amounts
Monthly payments typically include principal, interest, real estate taxes, homeowners insurance, and mortgage insurance (if the down payment is less than twenty percent). For this discussion, we will only include the principal and interest component of the payment. Assume that a home buyer is pre-approved for a $300,000 property based on a thirty year term, 3.5% down payment, and 5% mortgage rate. The principal and interest monthly payment is approximately $1554. If the mortgage rate increases by 0.5%, that same borrower qualifies for only $283,638. That is a decrease of over $16,000 in the purchase price, which may be a smaller home. On the other hand, if mortgage rates drop by 0.5%, the maximum purchase price increases to $317,843. The table below illustrates the affect of additional changes for this same buyer using a monthly principal and interest payment of $1554:
|Mortgage Rate||Loan Amount||Down Payment||Sale Price|
Being An Educated Buyer
Be sure to ask your mortgage consultant about the total monthly payment amount for which you qualify. From there, you can better gauge the feasibility of homes prior viewing them. Remember that there are different calculations for the total payment: mortgage rate, municipal taxes, homeowners insurance, and mortgage insurance. If you intend to purchase a home near your qualification limit, then it is extremely important to monitor mortgage rates. Your loan officer and real estate agent can assist you with this analysis and offer other details on how mortgage rate changes affect MA pre-approval amounts.